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With passenger service to 60 Canadian cities, 50 in the U.S. and another 77 worldwide, Air Canada racks up a big fuel bill. But it wasn’t just low oil prices that made 2014 such a good year for the venerable carrier. Third-quarter net income was $323-million, up from $299-million the previous year, and the airline’s stock hit a six-year high.
Its pension plan deficit was eliminated and the plan swung into a surplus. Its pilots’ union voted 84 per cent in favour of a new 10-year contract. Air Canada was named Best North American Airline at the Skytrax World Airline Awards and Asia’s TTG Travel Awards. The Montreal-based company expanded its successful international discount carrier, Air Canada rouge, into the North American market. And it took possession of its first six Boeing 787 Dreamliners, whose fuel efficiency and long range are making many new international routes possible, including restarting non-stop service to India, which Air Canada abandoned almost eight years ago because the route wasn’t then financially feasible.
The performance and growth of Canada’s largest airline are all the more remarkable considering where they were five years ago. When Calin Rovinescu became President and Chief Executive Officer in 2009, Air Canada was in trouble. The then-72-year-old legacy carrier was committed to a massive pension plan – and a $3.7-billion pension deficit. In the wake of the 2008 financial crisis, banks weren’t lending, and the equity markets had all but dried up. On top of that, not only were all of Air Canada’s labour contracts set to expire, but employee groups were expecting the improved compensation they’d been promised during a 2004 restructuring.
“One of the best opportunities to effect transformational change in an organization is when you have a burning platform,” says Rovinescu, who left investment bank Genuity Capital Markets, which he co-founded with David Kassie, to take the airline’s top job. “Air Canada had a burning platform, without a doubt.”
There were multiple fires to douse. Looking back, Rovinescu likens the situation to a Rubik’s Cube. “The problems had to be solved simultaneously,” he recalls. “In a perfect world, you organize the green side of the Rubik’s Cube, then you organize the red, then you organize the yellow. But we couldn’t wait until we had one side all blue before starting to get another side all yellow. We couldn’t solve the labour piece without having liquidity. We couldn’t solve liquidity without solving the pension deficit. We couldn’t solve the pension unless we had a deal with labour.”
Rovinescu and his managers adopted a philosophy of compromise: if they refused to settle for anything less than perfection for every single solution, they risked, in Rovinescu’s estimation, “losing the whole shot.” There were some non-negotiables, of course, but concessions were made to ensure long-term sustainability.
With no access to traditional financing, Air Canada struck a deal with existing stakeholders (ACE Aviation Holdings Inc., GE Canada Finance Holding Co., Export Development Canada and Groupe Aeroplan Inc.), but there was a catch: the airline first had to settle its labour contracts.
Air Canada used large blocks of shares in place of wage increases to sweeten contract renegotiations and entered into a pension arrangement with the federal government that gave it more time to cover the pension shortfall. In exchange, executive compensation was frozen at the rate of inflation, and dividends and share buybacks were prohibited.
Rovinescu has strong feelings about what he calls the “totally inappropriate” way that pension deficit is calculated in Canada. “But if we had tried to convince the unions that pension deficits are theoretical and would be eliminated over time, we probably would not have gotten the deal done,” he says. With the ink dry on new contracts and the spectre of labour unrest gone, the airline was able to secure that financing. The dominoes began to fall. “The markets started getting friendlier,” Rovinescu relates.
Once the burning platform had been extinguished, he says the company was able to start fulfilling a vision of “building an international powerhouse based in Canada.” It strengthened its four domestic hubs (Toronto, Vancouver, Montreal and Calgary), improving wayfinding systems and streamlining traveller processes such as immigration and border control. Then it added more international, long-haul flights in and out of those hubs and redesigned the in-flight experience with amenities such as lie-flat seats. The idea was to not just to strengthen the traditional market of Canadians flying to international destinations, but to become a major player in an emerging market: global travellers using Canada as a connecting point on flights between two other countries.
Given the right price, amenities and in-air time, business travellers in the U.S., for example, might now choose to fly to China through Toronto, or a Brazilian traveller may fly to Tokyo via Vancouver. “As odd as that might seem at first blush,” says Rovinescu, “there is competition now between international hubs like Toronto or Chicago or Frankfurt or London for that flow traffic. As airplanes have become capable of flying longer-haul destinations, the decisions about where you connect in the world are different than they were a decade ago.” Air Canada’s airline partnerships within the Star Alliance network and a joint venture with United Airlines, Inc. and Deutsche Lufthansa AG over the Atlantic are another asset, allowing travellers to fly deeper into foreign markets than its own direct routes allow.
In 2010, with “the patient stabilized,” Rovinescu began to focus on transformation. He looked at “everything from hard decisions on revenue policies in terms of what kinds of inventory we’d make available at different price points to maintenance practices to redemption opportunities on our loyalty program – and in some cases we had to make difficult decisions where the costs were too high.” The result was a $530-million improvement in recurring costs and additional revenues on an annual basis. “That $530-million got us to the next level, which resulted in an acceptable level of profitability, and now we’re getting to the next level with some revenue opportunities as a result of some of the new tools we’ve introduced,” Rovinescu says.
Those opportunities include the leisure market. In 2013, the company launched Air Canada rouge, a budget airline largely focused on vacation travel to sunny destinations in the winter and Europe in the summer months. There’s also a continuing commitment to changing the corporate culture, from the boardrooms to the frontlines, with annual targets that support the longer-term goal of increased entrepreneurship and empowerment. In 2012, for example, the airline introduced the Yammer social media tool to promote in-house idea sharing. A McGill University professor was brought in to give MBA-level instruction on marketing, international business and breaking down corporate silos to mid-level managers.
Culture change never takes place overnight, especially when dealing with a diverse community of more than 27,000 employees. “Not all our executives always believed in these initiatives,” Rovinescu says. “Sometimes we had to change executives; sometimes we had to change our process.”
Contrasting 2009 and 2014, he cites the new pilots’ contract and the “unbelievable sense of pride” shown by the 15,000 staff who lined up to see the new Dreamliner as proof of the airline’s renewed workforce engagement. “Unlike a hangar or a factory or an aircraft, this is an asset that evolves and changes. It’s a living, breathing asset.”